JPMorgan, Credit Cards, Morgan Stanley: Compliance

By Ellen Rosen -
Oct 3, 2012

The New York lawsuit over mortgage-
backed securities filed Monday against JPMorgan Chase & Co. (JPM) will
serve as a template for suits against other issuers, state
Attorney General Eric Schneiderman said.

Schneiderman alleged that the Bear Stearns business that
JPMorgan took over in 2008 deceived mortgage-bond investors
about the defective loans backing securities they bought,
leading to “monumental losses,” according to a complaint filed
yesterday in New York State Supreme Court.

The Bear Stearns mortgage unit packaged $212 billion in
mortgage bonds from 2003 through 2006, according to the
complaint. Losses on $87 billion of those bonds packaged during
just two of those years total $22.5 billion so far, it
estimated. Schneiderman said he wants the bank to disgorge all
money it obtained in connection with or as a result of the
alleged fraud.

“This is a workable template for future actions against
issuers of residential mortgage-backed securities that defrauded
investors and cost millions of Americans their homes,”
Schneiderman said in a statement.

New York hasn’t fully identified the losses in the JPMorgan
case, Schneiderman said yesterday in a teleconference.

Schneiderman is co-chairman of a state-federal group formed
to investigate misconduct in the bundling of mortgage loans into
securities leading up to the financial crisis. The group
includes officials from the Justice Department, the Securities
and Exchange Commission, the FBI and other federal and state
officials.

Joe Evangelisti, a JPMorgan spokesman, said the New York-
based bank would contest the complaint, which is “entirely
about” conduct by Bear Stearns. JPMorgan acquired Bear Stearns
in March 2008 after a run on what was then Wall Street’s fifth-
largest securities firm.

The case is People of the State of New York v. J.P. Morgan
Securities, 451556-2012, New York State Supreme Court, New York
County (Manhattan).

Scrutiny from the Consumer Financial Protection Bureau has
led to fines against banks including Capital One Financial Corp. (COF)
and Discover Financial Services (DFS), prompting them to curtail sales
of so-called add-ons that offer to help customers pay card bills
if they get sick or lose their jobs, or to monitor their credit.

American Express also is cooperating with regulators amid
an “industrywide review” of the products, said Michael
O’Neill, a spokesman for the New York-based lender.

AmEx, the biggest U.S. credit-card issuer by purchases,
said on Monday that it will pay $112.5 million to settle claims
it violated consumer safeguards from marketing to collections in
products sold to about 250,000 customers. That case didn’t
involve add-on products.

The crackdown is CFPB Director Richard Cordray’s first
enforcement campaign after the Dodd-Frank Act consolidated
regulation of retail financial products under one federal
agency. With U.S. banks already complaining that regulation has
squeezed revenue, the bureau is considering new limits on payday
lending and fees for checking overdrafts, and has proposed an
overhaul of mortgage practices.

For more, click here.

SEC Questions Revenue Disclosures of Real Estate Site Zillow

Zillow Inc. (Z), the real estate website, fell yesterday after
the U.S. Securities and Exchange Commission asked the company to
respond to questions about how it reported revenue.

Seattle-based Zillow declined 4.21 percent to $39.11 in New
York. Before the release of the SEC’s letter, the stock had
gained 82 percent this year.

The SEC asked in a letter dated Aug. 30 why the company
didn’t report the percentage increase in the average price paid
for so-called Premier Agent subscriptions in its most recent
financial report, according to a regulatory filing. Zillow said
it would revise disclosures in its next quarterly report,
according to the filing.

In addition, the SEC asked why total marketplace revenue
growth appears to be slowing while Premier Agent subscription
revenues look to be increasing. In response, Zillow said in the
filing that it would start disclosing the average monthly
Premier Agent revenue per subscriber.

“This letter was in response to an early 2012 10-K filing
submitted by Zillow, and we have since responded to the SEC’s
satisfaction,” Katie Curnutte, a Zillow spokeswoman, said in an
e-mailed statement.

Separately, the SEC also asked Zillow to disclose the
number of unique users by domain name for different websites the
company operates, including Zillow.com and RentJuice.com,
according to a second letter released in a regulatory filing.

Former Madoff Employees to Be Tried Next Year, Judge Says

U.S. District Judge Laura Taylor Swain set the date
yesterday after the former Madoff employees, Daniel Bonventre,
Annette Bongiorno, Joann Crupi, Jerome O’Hara and George Perez,
pleaded not guilty to new charges.

Prosecutors in the office of U.S. Attorney Preet Bharara in
Manhattan on Oct. 1 filed a new indictment alleging the five
joined a conspiracy to defraud investors that got its start in
the early 1970s. The charges add to the 17 criminal counts filed
against the former employees in November 2010, for a total of 33
counts.

Bonventre, 65, and Bongiorno, 64, worked for Madoff for
40 years. Bongiorno rose to the level of supervisor and account
manager. Crupi, 51, an employee since 1983, tracked daily bank
account activity, prosecutors said. Perez, 46 and O’Hara, 49,
started at the firm in the early 1990s.

Assistant U.S. Attorney Lisa Baroni told Swain yesterday
that the prosecution case against the five will take about two
months. Swain said she will set aside 3 1/2 months for the
entire trial.

Madoff, 74, pleaded guilty to fraud in 2009 for cheating
investors out of $20 billion in principal. He is serving a 150-
year term in federal prison in North Carolina.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District
Court, Southern District of New York (Manhattan).

Florida Man Pleads Guilty to Phony Facebook Share Scam

A South Florida man charged with running an $11 million
scam involving nonexistent shares in companies including
Facebook Inc. (FB) and Groupon Inc. (GRPN) was taken into custody after
pleading guilty to criminal charges.

John Mattera, 50, who operated Praetorian Global Fund Ltd.,
pleaded guilty yesterday in Manhattan to three criminal counts
-- conspiracy, securities fraud and wire fraud -- and tried to
plead guilty to a fourth, money laundering. U.S. District Judge
Richard Sullivan declined Mattera’s request to remain free on
bail, ordering him jailed after a two-hour hearing.

In a plea agreement, Mattera and prosecutors said federal
sentencing guidelines call for a term of 10 to more than
12 years in prison. Sullivan may disregard the guidelines in
sentencing Mattera.

In the SEC case, U.S. District Judge Kevin Castel in New
York found that Mattera sold a Lamborghini automobile for
$28,000, which he passed to his mother, in violation of a court-
ordered asset freeze. Mattera also borrowed $114,000 and
transferred money to his mother to pay his expenses, also in
violation of the order, Castel said.

Carl Schoeppl, Mattera’s lawyer, declined to comment on the
case after the hearing.

The case is U.S. v. Mattera, 11-CR-2947, U.S. District
Court, Southern District of New York (Manhattan).

Courts

Morgan Stanley Loses Appeal in $245 Million Citigroup Suit

A federal appeals court in Manhattan upheld a ruling
against Morgan Stanley & Co. (MS) in a breach-of-contract suit in
which it’s accused of failing to pay a Citigroup Inc. (C) unit
$245 million under a swap agreement.

Citibank NA arranged the swap for protection in the event
that a collateralized debt obligation based on a line of credit
provided to an entity called Capmark defaulted, according to the
ruling yesterday.

Citibank sued in 2009, alleging that Morgan Stanley refused
to pay the shortfall owed under the swap after Capmark defaulted
on its loan agreements and the $366 million CDO was liquidated.
In 2011, U.S. District Judge Shira A. Scheindlin ordered Morgan
Stanley to pay $245 million plus interest.

Lauren Onis, a spokeswoman for New York-based Morgan
Stanley, declined to comment on the appeals court ruling.

“We are pleased with the decision of the Second Circuit of
Appeals affirming the judgment in our favor,” Danielle Romero-
Apsilos, a spokeswoman for New York-based Citigroup, said in an
e-mailed statement.

The case is Citibank N.A. v. Morgan Stanley & Co.
International Plc, 11-2592, U.S. Court of Appeals for the Second
Circuit (Manhattan).

U.S. Role in Lehman Collapse Allowed in Reserve Trial

The U.S. government’s role in the collapse of Lehman
Brothers Holdings Inc. will be allowed as evidence in the Oct. 9
trial over allegations that Reserve Primary Fund misled
investors in 2008, a federal judge in Manhattan ruled.

The company will be permitted to present evidence that its
confidence in Lehman’s finances were based in part on the U.S.
Securities Exchange Commission’s oversight of the investment
bank under a voluntary regulatory program, according to the
decision by U.S. District Judge Paul Gardephe.

A trial is scheduled to begin Oct. 9 in the SEC’s case
alleging that the company misled investors about the safety of
the fund after it suffered losses in Lehman investments. The
fund, which held $785 million in debt issued by Lehman, became
the first money fund in 14 years to expose investors to losses
when Lehman filed for bankruptcy protection in September 2008.

“Defendants intend to argue that Bent Sr. believed that
Lehman’s financial reports were sound, and this belief was
critical to his state of mind on September 15 and 16,” Gardephe
said in his ruling, referring to Reserve Partners founder and
Chief Executive Officer Bruce R. Bent, a defendant along with
his son, Bruce Bent II.

The judge excluded evidence regarding government actions
following Lehman’s bankruptcy filing and the beginning of
Reserve Primary Fund’s collapse, including government bailout
programs and the SEC’s investigation of Lehman and other
financial firms.

John Dellaportas, a lawyer for the defendants, and SEC
attorney Nancy A. Brown didn’t immediately return calls for
comment on the ruling.

The case is SEC v. Reserve Management Co. Inc. 09-cv-
04346, U.S. District Court, Southern District of New York
(Manhattan).

Playboy Enterprises to Settle Investor Case for $5 Million

Playboy Enterprises Inc. agreed to pay $5.25 million to
settle a lawsuit over claims its founder, Hugh M. Hefner,
shortchanged investors in a going-private buyout in March.

Stockholders sued beginning in 2010 over the offer, which
started at $5.50 a share and increased to $6.15 a share the
following year. The parties agreed to the settlement partly to
avoid continued litigation, according to Delaware Chancery Court
papers made public yesterday in Wilmington. Playboy, based in
Chicago, denied any wrongdoing.

“Plaintiffs’ counsel have concluded that the settlement is
fair and adequate and that it is reasonable,” the parties wrote
in their memorandum. The agreement requires a judge’s approval.

Playboy expanded globally in the 1960s and 1970s when
Hefner, now 86, ran the company. The company went public in 1971
and circulation reached 7.2 million for one issue in 1972.
Hefner is the company’s chief creative officer.

ResCap Mortgage Holders Seek Details on Servicing Unit Sale

Residential Capital LLC, the bankrupt mortgage unit of Ally
Financial Inc. (ALLY), should be barred from selling its loan servicing
unit until the company provides more information about the deal,
investors who bought ResCap mortgages said in court papers.

Fannie Mae and Freddie Mac, the two government-chartered
mortgage buyers, on Monday objected to the sale, claiming that
without changes the proposed deal may threaten contracts they
have with ResCap to service loans.

The unit being sold collects payments and provides
foreclosure services on more than 1 million loans Fannie and
Freddie bought from ResCap. Because they own a large share of
the 2.4 million loans that ResCap services, the two mortgage
holders said in court papers filed in Manhattan, they expected
ResCap to be more cooperative.

ResCap, based in New York, filed for bankruptcy in May with
plans to sell most of its assets and resolve legal claims
related to residential mortgage-backed securities.

The company said last month that it is working to resolve
objections to the proposed sale.

In separate filings, Fannie Mae and Freddie Mac said they
would support the sale if ResCap and the winning bidder provide
enough information to ensure that their servicing contracts are
not disrupted.

The case is In re Residential Capital LLC, 12-12020, U.S.
Bankruptcy Court, Southern District of New York (Manhattan).

Speeches and Conferences

SEC Holds Conference on Trading Technology and Crisis Management

The U.S. Securities and Exchange Commission yesterday held
two roundtable discussions on trading and efforts to prevent
errors. Led by Robert Cook, director of the agency’s trading and
markets division, the first session focused on market technology
and efforts to prevent trading errors. Participants in that
panel included Chris Isaacson, chief operating officer of Bats
Global Markets Inc.; Jamil Nazarali, head of Citadel Execution
Services at Citadel LLC; Lou Pastina, an executive vice
president at NYSE Euronext; and Jonathan Ross, chief technology
officer of Getco LLC.

The second session focused on market responses once errors
have occurred. Participants included David Bloom of UBS AG, Chad
Cook of Lime Brokerage LLC, Anna Ewing of Nasdaq OMX Group Inc.
and Lou Steinberg of TD Ameritrade Holding Corp.

To view the first panel discussion, click here. To view the
second panel’s discussion, click here.

Miliband Seeks Tighter U.K. Merger Rules Against ‘Predators’

U.K. opposition leader Ed Miliband pledged to tighten
takeover rules and end quarterly reporting for companies, saying
that would encourage longer-term thinking and businesses that
are “producers” rather than “predators.”

In his keynote speech yesterday to his Labour Party’s
annual conference in Manchester, England, Miliband laid claim to
the “one nation” model of politics defined by Conservative
Prime Minister Benjamin Disraeli in 1872 and said banks and
other businesses should be bound to similar tenets. He said
David Cameron, the current Tory leader and premier, had
abandoned “one nation” policies.

Miliband said Labour is now the party best able to
represent people of all backgrounds and incomes, and that recent
British governments, including those headed by Labour’s Tony
Blair and Gordon Brown, in which he was a minister, failed to
hold the powerful to account.